Fixing Interest Rates? Of course

Shock horror! The Barclays scandal reveals that the banks fiddle and lie to fix interest rates. Some government ministers and the Bank of England may even have been in on the scam. And we are supposed to be surprised by all this. Banks, including the Bank of England, create money out of thin air, and make their profits from doing so.

This has been most obvious during the Quantitative Easing programme. The government and the Bank were worried that people were paying down their debts, and the banks weren't lending to businesses, so there was less money circulating. Solution: print some more. Commercial banks do the same thing when they make a loan, or give a customer credit.

The whole credit bubble that brought the banks down happened because they were rash about lending, and we were rash about borrowing. QE means that, to pay for the bail-out of the banks and their customers, people who have savings have to see them inflated away. Money is not a commodity; bank staff don't make it like factory workers make laptops or lingerie. It is a means of exchange, and its 'price' (the rate of interest on a loan or credit card debt) is whatever the banks can get away with charging for something that they have costlessly created. But because the financial sector is so significant a part of our economy, the Bank of England and the government want us to believe that the quantity of money and the interest rate are sacred numbers that emerge from international competition between London, New York and Tokyo, Frankfurt and Paris, through global money markets. We are supposed to swallow the idea that our bankers and politicians never tip each other the wink, or meet to set rates, but always accept the will of these markets as Holy Writ.

So this agonising about the Barclays scandal is mostly obfuscation and hypocrisy. We are supposed to believe that bankers deserve to have been bailed out, because they earned their salaries and bonuses by the brilliance of their dealings against the brute facts of international competition, in a risky and unstable environment. In this way, we will not notice that we are being ripped off - though not as badly as the Irish, Greeks, Portuguese and Spanish are, still paying for bail-outs that didn't even save their brilliant banks. Bob Diamond and his mates have let the side down by allowing the public to glimpse that all this is a fiction. Interest rates will always be set by bankers and others in concert, because the rest of us can't influence them in the way we can other prices, by voting with our feet. More's the pity.